Uranium Analyst Rob Chang of Cantor Fitzgerald

This interview of Rob Chang at Cantor Fitzgerald is based entirely on his own Uranium Sector views. I have no prior or existing relationship with Mr. Chang, Cantor Fitzgerald or any company listed herein. Rob Chang has been a proponent of the uranium sector for quite some time. Peers Rick Rule, & [Alex Molyneux of Azarga Uranium], [Mickey Fulp the Mercenary Geologist], and [Jeb Handwerger of goldstocktrades.com]are squarely in the uranium camp as well. Chris Berry of Disruptive Discoveries Journal said in 2014 that a uranium sector rebound is a 2016 event. Nice call! Issues discussed in the following interview help explain what has happened and what is likely to happen (timing unknown) in the global uranium arena. Enjoy the interview.

Peter Epstein, CFA, MBA @peterepstein2 epstein.peter4@gmail.com

Rob, some consider you one of the more bullish uranium sector analysts. Do you agree? Can you share Cantor’s price forecasts from 2016-2020?

I guess I’ve been one of the more bullish on the space, but that’s because fundamentals remain highly compelling. I have no doubt that there will be a substantial movement higher in the uranium price when utilities start scrambling for supply in 2016 or 2017. We were likely seeing the beginning of a sustainable increase in the months prior to the Fukushima disaster in March 2011. I firmly believe that while I’ve been early in my call, the uranium price is poised to rise in each of the next 4-5 years. I simply can’t see a scenario in which uranium prices fail to move higher. As far as my firm’s price deck, we have $50/lb in 2016, $60/lb in 2017, $70/lb in 2018 and $80/lb from 2019 on.

Do you believe that the latest news from Japan is a sentiment builder, or perhaps not so much since it’s taken so long?

The Fukushima restarts would have been a sentiment builder, if not for China devaluing its currency the following day. Any positive momentum from that restart headline was lost. It appears that uranium is snakebitten, always finding a way to not go up. Fukushima derailed what appeared to be an impressive really for uranium a few years ago. Now we have China’s devaluation and significant market weakness for natural resource stocks.

Pundits say the long-term uranium price needs to recover to US$70-$75/lb for early-stage projects to move forward. Any thoughts?

When one factors in the required amount of uranium necessary to fuel the reactors being built around the world, especially in China and India, we believe that number is closer to US$80/lb. The world will need some of the large, but relatively low-grade, African projects to come online to be confident in meeting demand. Most of those require at least US$80/lb to be economically viable. Perhaps even higher when one factors in country risk, funding challenges and cost inflation since the Fukushima event.

Almost universally, ISR uranium projects tend to mine deposits in the 1-10 million pounds range, supporting production of about 1 million pounds annually. The notable exception are the mega ISR amenable deposits in Kazakhstan. The economics for ISR may always appear to be better, conventional projects in the Athabasca basin of Canada have the scale and grade to be among the best in the world. McArthur River’s underground mine, operated by Cameco, is currently ramping up to 20 million pounds annually.

You initiated coverage on Azarga Uranium. Its Dewey Burdock ISR project does not appear to be appreciated, (or even noticed) by the market. Why might that be?

Azarga Uranium (AZZ.TO) is an under-the-radar uranium developer with near-term production capability. At 0.25% U3O8, it’s the highest grade ISR project in the U.S. In addition, the Company appears to be noticeably undervalued at a C$16 million market cap. Azarga is trading at just 22% of our NAV10% of C$74 million. Of course, we recognize that everything’s undervalued, but when one looks at the grade, manageable cap-ex requirement and near-term track to production (2017-18), we think that Azarga is trading too cheap.

When do you think utilities will come to the table again? Will they want to contract for 3-5 years, or less?

Until 2011, when Fukushima began to lead to excess inventories, utilities had historically signed 5 year contracts about 3 years in advance. Subsequently, utilities have shortened contracting time frames, now filling a larger portion in the spot market. It’s a bit risky to operate that way, but they’ve been rewarded for 3-4 years by approaching the market in this way.

While no one can predict exactly when utilities will come back to the table to negotiate longer-term contracts, historically just 10%-15% of fuel requirements were served from the spot market. Today, utilities are largely uncovered beginning in 2017 & 2018. What’s more, this uncovered amount is steadily growing each year as many contracts are now rolling off and not being extended. Utilities will either have to enter into more longer-term contracts in the next few years or step into the spot market in a much more meaningful way, which would of course cause the spot price to rise, perhaps by a lot.

Can you briefly discuss a few other uranium companies you cover? Have any performed well vs peers?

Our uranium coverage universe is NexGen Energy, Energy Fuels, Ur-Energy, Cameco, Fission Uranium, Denison Mines, Uranium Participation, Uranium Energy Corp, and Kivalliq Energy. Of that list the biggest outperformed has been NexGen Energy as it recently discovered what appears to be the next monster uranium deposit in Canada. Coincidentally, it’s located adjacent to Fission Uranium’s Triple R deposit and along trend to Cameco’s Spitfire project.

Regarding the Athabasca region, I was told by an expert that I trust that early stage projects could be 10-15 years from production. Any thoughts?

It’s possible. But then again I could say that about any early stage uranium project anywhere in the world. The fact of the matter is that uranium is the most highly regulated commodity on the planet. Permits to explore, develop, and mine take a very long time to obtain due to a combination of slow regulatory movement and opposition from special interest groups that focus more on the Hollywood version of uranium mining’s impact on the environment as opposed to the facts.

Some pundits say the uranium renaissance is at least 2 years away. If true, what might that mean for uranium companies? All bets off, or will some advance projects, even if at a slower pace?

I firmly believe that uranium prices will undergo a significant and perhaps very rapid move higher in the near future due to the fact that there’s not enough primary supply to meet growing demand. Look, we’ve had several years of poor uranium pricing that has resulted in little to no incentive for uranium exploration. This, while countries like China and India, have been aggressively building out their nuclear energy fleets. Primary supply has been less than primary demand for years but it has not raised prices due to excess inventories. We believe that’s a one-off situation. At some point, we are going to whittle through the inventory and possibly find utilities with serious problems from being under-contracted. Countries like China and India continue to be forward thinking about this and have been building uranium stockpiles. Russia has as well.

At times I hear of companies selling uranium, presumably at prices near or modestly above spot. Why not leave uranium in the ground and wait for better prices?

Well, depending on the company, it could simply be to keep the lights on. It has been a tough market for years and some companies are struggling to come up with cash to support themselves as a going concern. Some companies do not care about pricing because uranium is a by-product of their core businesses. An example is BHP Billiton’s Olympic Dam mine. It’s a major producer of uranium, but to BHP its ranked behind gold, E&P and copper in terms of importance.

With the market for uranium and other natural resources experiencing such devastation, what could possibly change things? Are natural resource stocks highly correlated to the price of gold?

That’s a great question. But in general we need China to get back on track, that’s really the key driver of the global economy. That, and strength in U.S. and European economies would go a long way. But while we wait, it appears that M&A in the uranium sector has been growing. I would not be surprised to see additional M&A as companies position themselves for the inevitable rebound in pricing.

Thank you Mr. Chang for your timely and detailed answers to my questions.